Weblog of Joe Ross, Trading Educator and Trader for over 5 Decades

Recently, someone sent me the following question: “Just how committed does a trader need to be?”

I don’t know that I can put a number to that. For instance, on a scale of 1-10 how committed should a trader be. But if I had to evaluate it on that basis, I would say he must be a “10.”

What is the value of commitment? How do you measure such a thing?

Most people have an “interest” in becoming consistently profitable traders. However, few possess the essential ingredient of “total commitment.” Total commitment is what is demanded for a high level of success from any endeavor. A trader with commitment will take the money from 100 traders who have only an “interest.”

Commitment is seen as Cortez burning his ships upon landing in Mexico. With less than 100 men, Cortez rode into Mexico City against 100,000 Aztec warriors and placed Montezuma, leader of the Aztecs, in chains. Few people have ever accomplished any goals without commitment to success. For some traders, commitment to success is not optional but mandatory.

Your commitment to trading must be greater than your disappointments in trading.

Some time ago I spent 4 days in a Forex trading office, teaching and working with the traders there. It was interesting to see how these traders speak with one another, and to listen to what they say. I couldn’t help making some observations which I will now share with you.

If you are a part- or full-time trader, you may have enjoyed the attention this wild and wooly occupation brings at social gatherings and events. Many are interested in trading, and find you interesting as a successful trader. At first, the attention may be enjoyable; but a need to maintain this reputation may impact your trading attitude and mindset, and therefore, your bottom line.

The best strategy you can use to avoid letting your reputation influence your performance—especially when enduring a drawdown period—is to keep your conversation low-key about your trading career. Why? The more you present yourself socially as a “successful trader,” the more psychological effort you will spend defending this reputation. Several research studies have documented that one of the biggest obstacles to sound decision-making is the need to save face in social situations. People are so reluctant to face the adverse social consequences of having made a poor decision that they stay on a losing course of action, rather than admit they were wrong. For example, some traders are reluctant to sell off losers in order to avoid the possible social criticism that acknowledging a failure may bring.

Suppose you have told your friends about a large position, and within minutes, hours, or days, it tanked, hard and fast. Most folks can’t wait for the next opportunity to ask you (even though they probably know the answer) how your “hot trade” is doing. If you got rid of it, at least you have the solace of managing the trade properly—even though you must tolerate a volley of smug “you-thought-it-would-go up and such, but-it crashed-instead” comments. On the occasions when you ignored your protective stop, however, and held onto the bad trade, the “Boy, you-really-ARE-dumb” looks (and perhaps comments) can exacerbate the psychological devastation you’ve by now, surely, inflicted on yourself. And we all know the negative impact a negative attitude can have on our trading.

As another example, how many times has the market gapped up, then chopped through the rest of the day, handing you more losses than wins? Inevitably, those are the days when well-meaning friends call on the phone. “You must have made a fortune today!” they gush. “Not really,” you mumble with a sinking heart, remembering the frustrating trading environment. After you hang up the phone, the subsequent feelings can lead you to believe you must have been a dope that day; surely every trader in the world except you grabbed huge gains. In social environments, once you announce and identify yourself as a trader, you will feel a need to defend your reputation. Trading is hard enough, why introduce additional social and psychological pressures that will adversely influence your trading results? Keep the specifics of your trading career to yourself. There is no sound reason to discuss the specifics of your career socially. It’s often done just to build up your ego, and enjoy the attention of others. You’ll pay a price for this short-term gratification in the long run. Avoid specific observations or trading choices. That way, you’ll avoid embarrassing questions and comments that will interfere with your trading.

THE TRADE DECISION

1. Never add to a losing position.

2. Always determine a stop and a profit objective before entering a trade. Place stops based on market information, not your account balance. If a “proper” stop is too expensive, don’t do the trade.

3. Remember the “power of a position.” Never make a market judgment when you have a position.

4. Your decision to exit a trade means you perceive changing circumstances. Don’t suddenly think you can pick a price, and exit at the market.

THE MARKET HAS CHARACTER

5. In a Bull market, never sell a dull market, in Bear market, never buy a dull market.

6. There are times, because of lack of liquidity, or excessive volatility, when you should not trade.

7. Trading systems that work in an up market may not work in a down market.

8. There are at least three types of markets: up trending, range bound, and down. Have different trading strategies for each.

9. Up market and down market patterns are ALWAYS present, merely one is more dominant. In an up market, for example, it is very easy to take sell signal after sell signal, only to be stopped out time and again. Select trades with the trend.

10. A buy signal that fails is a sell signal. A sell signal that fails is a buy signal.

11. It is always easier to enter a losing trade.

12. In the “blowout” stage of the market, up or down, risk managers are issuing margin call position liquidation orders. They don’t check the screen for overbought or oversold; they just keep issuing liquidation orders. Don’t stand in front of a runaway freight train.

13. If you are superstitious, don’t trade if something bothers you.

NEWS

14. Buy the rumor, sell the news.

15. News is only important when the market doesn’t react in the direction of the news.

16. Read today’s paper tomorrow. When you read yesterday’s paper each day with the knowledge of what the market already did, you will affirm that this mornings paper with yesterday’s news has nothing to do with today’s market.

A TIME TO TRADE

17. On the open, never enter a new trade in the direction of a gap. Never let the market make you make a trade. (Closing an existing position is obviously ok.)

18. The first and last ticks are the most expensive. Get in late and out early.

19. When everyone is in, it’s time to get out.

20. Never trade when you are sick.

TRACKING YOUR TRADES

21. Size kills. Only change your unit of trading under a plan of attained goals. Also, have a plan for reducing size when your trading is cold or market volume is down.

22. Confidence kills. Remember, you really don’t know anything. Respect the market every second of every day. Expect the unexpected. Always know your position and exit your trade immediately whenever you feel uneasy.

23. Measure yourself by profitable “days in a row,” not by individual trades.

24. The best way to break a streak of “losing days in a row” is to not trade for a day.

25. Don’t stop trading when your on a winning streak. “When your hot, your hot.”

26. Three strikes and your out! Don’t turn three losing trades in a row into six in a row. When you’re off, turn off the screen, do something else. “When your not, your not.”

27. Scalpers reduce the number of variables effecting market risk by being in a position only for seconds. Day traders reduce market risk by being in trades for a matter of minutes.

28. If you convert a scalp or day trade into a position trade, by definition you did not consider the risks of the trade.

29. Don’t ever fret about a missed opportunity. There is always another one just around the corner. Besides, several just happened that you didn’t even know about.

MARKET OPINIONS

30. If you look for market secrets you will only find things that no one cares about. Use the conventional tools.

31. Never ask for someone else’s opinion, they probably did not do as much homework as you.

32. When the market is going up, say “the market is going up.” When the market is going down, say “the market is going down.” Say it without qualifications, no “buts” attached. This is a reality check, you’ll be amazed at how hard it is to say what is literally going on in front of you when your mind is full of preconceived opinions.

33. THE DAILY MARKET COMMENTARY: I’ve never had an opinion I didn’t like, however, successful day trading requires flexibility. Do your homework not to develop a market opinion, but rather to understand the potential for both sides of the market. This will allow you to make your trades based on what the market is doing at the time of the trade.

34. Here is a quote to remember: “When you wake up, your instincts are wrong.”

SOME FINAL THOUGHTS

35. When you make a mistake of discipline, whine like a fool to anyone that will listen. Errors in discipline are mistakes you will keep on making for many years. Wearing ashes and sack cloth may help extend the time before you do it again.

36. If you squirmed and moaned while you read this list, then you share two obvious characteristics with many of us:

A. You have traded long enough to recognize that you (not the market) make mistakes, and you try to overcome them.

B. Now this is ugly, you have become part of the market and you can never leave. No matter where life takes you, you will always check the market and always want to continue being a part of it. It’s like that first true love; it will always be there no matter what the distance, no matter whether they are alive or dead.

Hey Joe! How should individual traders with not so large accounts handle times of increasing volatility? I’m a long term trader and I have to find a way to stay in the market!

Personally, I think that high volatility offers a great opportunity for smaller traders to participate in the commodity markets. I’m not talking about all futures here. I’m referring to the commodity futures in particular.
Your participation needs to be done in such a way that you capitalize on volatility. Don’t try to “call” the market. Don’t look for tops and bottoms. Stay away from indicators. In a volatile situation you have to do the opposite of everyone else. By that I mean look to the fundamentals. Look to trade in commodities with strong fundamental prospects and a potential to see excessive volatility. Gold is a great example. Crude oil and natural gas are good examples as well.

Now let me tell you how to play the situation: You need to begin trading options and futures combinations so that you can truly define risk. Here are examples of how I would go about it. Let’s say you realize in the long-term gold is going to hit $2,000 (I believe it will, but I don’t know when). So I would go long futures and long a put so I could define more precisely what my risk will be. If you think something is going down, go short futures and long a call. Other examples would be to short a futures contract and long multiple calls, or long a futures contract and long multiple puts.

In my opinion, using futures with multiple offsetting option plays is a way to play a long-term position in futures and benefit from increased volatility. Of course, you will still have to have a correct opinion in the market for the most part and you will have to find a market that has the potential to become volatile, but these days that’s easy. You could also simply enter outright long option plays, but without an
offsetting futures position, a mistake in timing would be a critical to your success.

Moving averages are an objective way to determine the current trend direction of a price movement. Moving averages filter out the random “noise” in past price data by “smoothing” or “averaging” out the fluctuations in price movement. However, traditional moving averages have more than one very serious deficiency. They are a lagging’ technical indicator. This means that moving averages, due to their mathematical construction (averaging prices over a number of prior periods) tend to lag behind the current market price. Also, they smooth away the detail some traders (like me) want to see.

Making trades based on the analysis of moving averages usually results in getting into and out of the market late, compared with the point at which the market’s price actually makes a low or high and changes direction. Depending on the market’s price movement, and the type and size of moving average used, this lag effect can be substantial, causing the difference between trading success and failure in today’s highly volatile, global markets.

Another problem is that moving average crossovers tend to lead to Whipsaws

Moving average lags are the weak-spot of moving averages. Technical analysts have spent years on research in a failed effort to eliminate it, while still retaining what they say are the beneficial “smoothing” effects of moving averages. As a result, numerous types of moving averages have been devised, each with its own mathematical formulation and effectiveness at discerning the underlying market trend while attempting to minimize the lagging effect.

Moving averages are often the basis for other technical indicators. The fact that they cannot keep up with today’s volatile markets means the indicators have the same weaknesses built into them as those of the moving average.

The assumption behind moving averages is that once a trend or swing is underway, it tends to keep going. Therefore, until the long moving average is crossed by the short moving average in the direction opposite from the prevailing swing or trend, the overall move is assumed to remain intact.

Traditional moving average crossover strategies are effective at identifying the current market direction in strongly trending markets. However, in non-trending, sideways markets, and even in trending markets when using very short moving averages which may be overly sensitive to abrupt price fluctuations, these approaches are subject to whipsaws. The result is erroneous trading signals at market tops and bottoms. The more often the market swings, the more often the errors occur. So, while you can make money in trending markets using moving averages, it is the choppy swinging markets, increasingly more common today, that can cause heavy trading losses.

Various crossover strategies have been created in a further effort to overcome this deficiency. One popular approach compares an actual price, such as the daily close, with a moving average value. Other commonly-used approaches attempt to minimize whipsaws and filter out faulty signals by using bands surrounding the moving averages, utilizing three or more moving averages, or combining moving averages with other single-market technical indicators for additional confirmation.

With today’s unprecedented intraday and inter-day market volatility, caused in no small measure by the globalization of the markets and resulting effects of related markets on one another, you can no longer rely solely on single-market lagging indicators such as moving averages. Moving averages always lag behind turning points in the market. Now, knowing that a market made a top or bottom several days ago is no longer an effective way to make trading decisions, if it ever was. Even a one day lag, in today’s fast-paced, globally interconnected markets, is too long to wait for this information.

It is essential that traders adopt an intermarket perspective and incorporate intermarket data into their current trading strategies, in order to develop effective leading indicators that correspond to how today’s global financial markets really exist.

The spread is defined as buying one futures contract, and selling a different but related futures contract. Specifically, when trading the crush spread you would buy soybeans and sell its respective products, the soybean meal and soybean oil. This is what is referred to as being crushed. If you buy the soybean meal or the soybean oil and sell soybeans, that is what is referred to as being reversed crushed. Soybeans alone have relatively little value. The value of soybeans is the fact that when crushed, the products have greater value globally. Soybean meal is of value to the farms that raise chicken and hogs. Soybean meal is rich with protein and is fed to these animals to fatten them up. Soybean oil is of value across an array of industries. Primarily, soybean oil is used in food as one of many available edible oils. Soybean oil is also being used in a mixture to create an alternate source of energy to compete with crude oil. These uses and others of the products give soybeans their value.

Hey Joe! It is so hard sometimes to make myself exit a losing trade. What should I do?

There is an old saying that goes like this: When day trading positions have had negative open equity most of the day, and an opportunity arises with less than 30 minutes of trading left in the day to exit the market at break even ─ go ahead and exit the market.

Unless the market is moving rapidly in your direction with expanding-in-length bars, and no more than 5 minutes left, exit immediately and consider the opportunity to exit a gift. Day traders are limited by the number of minutes that exist in a trading day and their profit objectives must take this fact into account before trade initiation. It should be extremely rare for you to initiate a day trade with less than fifteen minutes to go before the Close.

Better yet is to make it a rule to never ride a position having negative open equity. Unless you like to suffer, there is no point in holding a losing position for very long.

Best bet is to exit losing positions as soon as possible, and wait for a more opportune time to reenter the market.

It very important to learn this lesson: Quickly jump out of losing positions. It is also extremely important to learn to take something out of a position as soon as you are able. We have had 3 trades in the past two days that made money only because we took something out while we were able. Better something than nothing, and better breakeven than experiencing a loss. If you sit on losers, you are bound to have them.

Hey Joe! Should I reverse when I am having a loss?

Did you know that professional day traders reverse their positions about 60% of the time when they take losses? Why do they do this?? The market should not have technically reached the exit price, which is placed where the intra¬day market trend may have reversed the short term trend. Consider a market that moves a three-day average range above the opening price then breaks sharply to the downside and posts new intraday lows within the last hour of trading as a trend reversal condition. S&P locals will usually cover and may reverse a 100-point or greater sharp break on the first eight higher up ticks from an intraday bottom.

While you may not be willing or able to trade like an S&P insider, you must still learn to reverse when it is opportunistic to do so. For instance, let’s say you decide to go short on a TTE ahead of the breakout of a 1-2-3 high. What if you do get short and prices begin to head higher? Should you reverse? The answer is yes you should. At that point, what you are looking at is a TTE to go long ahead of the b/o of a Ross hook.

One of the most important things to learn in this life is how we behave, not only when we are acting on our own, but when we are part of the crowd. And what few of us understand is how many of our important daily actions are not thought out in advance. We are all attempting to survive in what is basically a hostile environment. Many of our actions are in response to some sort of stimulus, whether someone else’s words, or actions, or something physical like our computer going down while in the midst of a trade. It may be painful to admit, but in much of human behavior we act first and then rationalize what we did later. While we all try to be logical, in most instances the rationalization comes after the fact, if it comes at all, and in general it is not at all close to explaining why we acted in the way we did. It is tough to be honest with ourselves, but honesty with self holds the secret to success. This is nowhere more true than in trading.

Day traders should learn to press the market and add con¬tracts at crucial trend confirmation intraday prices, moving all protective stops to break even with additional contracts. When a bull market makes new half day highs, instead of trading a one price unit size, trade two or more price units with a tighter stop. Either the market profitably explodes, or the trade is exited immediately. When building bullish trading positions, move protective loss stops to break even as new positions are added. The location ideal for the protective stops are below a previous reaction low, a trend line, or psychological resistance price. And keep on mind that you are not adding to an existing position. You have it correct when you say adding “new” positions. They are new positions and must be managed as such, all the while remembering that each “new” position is put on that much closer to the end of the move and therefore carries increased risk.